Diversified manufacturer United Technologies Corp (UTX.N) reported a better-than-expected profit on Tuesday as its purchase of aircraft components maker Goodrich helped offset U.S. defense cuts and weakness across Europe.
The defense cuts, part of a massive sequestration program designed to reduce the federal budget, especially hurt its Sikorsky unit, maker of the Black Hawk helicopter, where profit fell 34 percent.
United Tech said sequestration could dent 2013 profit by 10 cents per share in the worst-case scenario, and could affect 2014 results.
"Sequestration is a reality, but it's unfolding slowly at this time," Chief Executive Louis Chenevert said in an interview. "We will understand more what sequestration does as we get to the end of the year."
Sales to the Department of Defense make up roughly 17 percent of United Tech's revenue. Lockheed Martin Corp (LMT.N), the biggest weapons supplier to the U.S. military, also warned on Tuesday that sequestration would weigh on its 2013 revenue.
United Tech's first-quarter earnings would not have grown without last year's $16.5 billion Goodrich acquisition - the largest in the company's history - as well as a deal to take control of engine maker IAE. Chenevert said both deals were working out better than expected and would help the company meet its goal for 2013 earnings of $5.85 to $6.15 per share.
Analysts look for 2013 earnings of $6.11 per share, according to Thomson Reuters I/B/E/S.
"I'm very encouraged by the company on the aerospace front," he said.
The $16.5 billion deal for Goodrich boosted United Tech's portfolio of wheels, brakes, gyroscopes and other aircraft materials in demand from airlines and aircraft manufacturers.
As a result, its UTC Aerospace Systems unit posted a spike in both first-quarter revenue and profit.
Orders for Otis elevators, the company's most profitable unit, jumped 24 percent, largely due to demand from China. Orders for air conditioners and other climate control products rose 5 percent in the same period.
New orders, not necessarily the same as revenue, are a key indicator of demand and closely monitored by Wall Street.
Demand for commercial heating, vacuum and air conditioning units dropped sharply in Europe. The continent contributes roughly 25 percent of annual sales.
"While Europe had some pluses and minuses, it was no surprise," Chenevert said. "We are seeing it unfold as we expected."
The company said it would cut debt by $2 billion this year, up from a previous goal of $1 billion. Debt fell slightly in the period to $21.57 billion.
Greg Hayes, the chief financial officer, said strong cash flow and low interest rates convinced him to cut more debt than previously expected.
Some debt assumed during the Goodrich deal is at interest rates around 6 percent, far higher than market rates, and was worth paying down quickly, Hayes said.
"I've got cash sitting here that's earning nothing," he said in an interview. "Quite frankly it just makes sense for us to pay down some of that legacy Goodrich debt."
The move should save United Tech about $15 million in interest payments this year and $30 million next year, he said.
REVENUE MISSES EXPECTATIONS
United Tech posted first-quarter profit of $1.27 billion, or $1.39 per share, compared with $330 million, or $1.31 per share, in the year-earlier period.
The year-before figures included a one-time charge for discontinued operations. Analysts expected first-quarter earnings of $1.30 per share.
Revenue rose 16 percent to $14.39 billion, but missed the $14.94 billion estimate from Wall Street.
The strong profit was a positive for Wall Street, but the revenue miss suggested the company was relying too much on cost cuts rather than higher sales.
United Tech stood by its forecast for 2013 earnings of $5.85 to $6.15 per share and 2013 revenue of $64 billion to $65 billion.
Shares of United Tech fell nearly 1 percent to $92.72 in morning trading. The stock has gained nearly 14 percent so far this year.
(Reporting by Ernest Scheyder; Editing by Jeffrey Benkoe and Gerald E. McCormick)